The standard residential purchase contract in California is produced by the California Association of Realtors® (CAR). It contains two sections that are easy to overlook or to take as “boilerplate”, but that can be very important if things go awry between the parties. One of those sections deals with attorney fees, providing that, in the event of any proceeding between buyer and seller, the prevailing party shall be entitled to attorney fees and costs from the non-prevailing party. The attorney fee section contains an exception, however, and that exception is spelled out in the portion of the contract referring to mediation. There it is said that, if either party initiates an action “without first attempting to resolve the matter through mediation, or refuses to mediate after a request has been made, then that party shall not be entitled to recover attorney fees… .” [my emphasis]

It is important to remember that mediation is not the same as arbitration. Arbitration results in a decision by an arbitrator that has the same effect as a court decision. It is binding. In mediation, however, both parties try to reach a mutually acceptable solution. If they can't, then so be it, they may then go on to court or arbitration. But mediation requires that they at least try to work things out.

The mediation provision in the residential purchase contract should not be taken lightly. This is the clear lesson of a recent decision (Lange v. Schilling et al.) handed down by California's Third Appellate District Court of Appeal.

In 2003, Jay Lange, a real estate broker, purchased a lake house from Dwight and Linda St. Peter. The sellers were represented by Roxanne Schilling and Segerstrom Real Estate, Inc.) Subsequently, Lange encountered what he felt were various construction defects as well as feeling that misrepresentations had been made regarding the lake level.

Lange filed a complaint on March 15, 2004. At the time he did not know the sellers' whereabouts and was unable to serve them with the complaint. On May 11 he hired an investigator to locate the sellers, and on May 27 the investigator reported a mailing address at a private mail box facility in Nevada. The complaint was sent to that address, but no response was received. A default against the sellers was entered on August 23.

In September, after contact had been made, Lange's attorney wrote to the sellers' attorney that his client would then be willing to hold off the litigation (i.e. the default had been entered but no judgment had yet been requested) in order to mediate the matter if the sellers were willing.

Mediation did not take place and, ultimately, the issue went to trial. The jury returned a mixed verdict resulting in a $13,475 judgment against the sellers and real estate agents. In achieving that $13,475 judgment, Lange had racked up slightly more than $113,000 in attorney fees. (There's a lesson there, folks.) He filed a motion that the defendents should pay, based on the contract's attorney fee clause.

The defendents contested his motion based on the fact that he had not attempted to mediate prior to filing the complaint, as the contract's mediation provision requires. But the trial court ruled that Lange “offers reasonable justification for failing to offer mediation prior to filing suit: He could not locate [sellers].” The court further found that Lange had “substantially complied” with the mediation provision by his subsequent offer to mediate. The court awarded $80,710 in fees, which reflected the amount incurred after the offer to mediate.

The defendents appealed and the appellate court reversed the award of attorney fees. Its ruling relied on the clear meaning of the contract's mediation provision. The court agreed with the defendants that “If the [sellers] could be found and served with a lawsuit by mail, they could have been sent a mediation demand by mail.” All that the plaintiff had to do was attempt to mediate before he filed suit; and he didn't. Quoting a related case, the court noted that the mediation provision “means what it says and will be enforced.” How refreshing!

Published: July 21, 2008

Use of this article without permission is a violation of federal copyright laws.

Bob Hunt is a director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .